October 10, 1978
Page 35331
Mr. MUSKIE. Mr. President, I have an analysis of the bill.
I intend these comments to inform my colleagues of the impact this bill would have on the 1979 and future budgets. In addition as a member of the Senate concerned with the equity, efficiency, and simplicity of our tax system, I want to comment on the impact of provisions of the pending bill on achieving these goals.
Mr. President, the second budget resolution for fiscal year 1979 provides up to $21.9 billion of tax reductions below current law levels. This amount includes the effect of extending temporary tax reductions now scheduled to expire at the end of 1978.
According to the Congressional Budget Office and the Joint Committee on Taxation, H.R. 13511, as reported by the Finance Committee, would have reduced fiscal year 1979 revenue collections by $20.5 billion. This would have left $1.4 billion for additional fiscal year 1979 revenue reduction legislation.
I want to compliment the distinguished chairman of the Finance Committee and the members of the Finance Committee for having reported a bill generally consistent with the concurrent budget resolution for fiscal year 1979. I recognize the many pressures for additional tax reductions with which the Finance Committee had to contend. And I applaud the restraint shown by the committee, particularly with respect to the impact of its revenue decisions on fiscal year 1979.
However, the Senate has adopted amendments to the Finance Committee bill which have substantially altered the bill, particularly in the out years.
For fiscal year 1979, as I am sure every Senator is aware, amendments to the bill consumed almost the entire $1.4 billion margin the Finance Committee left for additional tax reductions including energy tax legislation and tax relief for Americans abroad.
The pending bill, therefore, does not breach the budget resolution revenue floor by itself, but unless the bill is scaled down in conference there will be inadequate room in the budget for these other major tax measures I have just enumerated.
Mr. President, the American taxpayer has demanded tax relief for fiscal year 1979. But such reductions must be provided within the constraints of the second budget resolution. The Senate has now voted to remove any budgetary constraint on revenue losses in 1980 and thereafter. And we have all witnessed the result.
The fiscal year 1980 and 1981 revenue reductions contained in the bill reported by the Finance Committee were approximately $4.2 and $6.6 billion larger respectively than the revenue reductions assumed in the projections of the Budget Committee. These larger later year reductions compared to the budget assumption resulted from the inclusion by the Finance Committee of several measures which have relatively small fiscal year 1979 effects but substantially larger out year effects. Major provisions of this type are the capital gains relief, the expanded earned income credit provisions, and the expanded asset depreciation range (ADR) system.
When I first looked at the Finance Committee bill, I was somewhat concerned about the amounts by which the bill exceeded the revenue losses in the 1980's as projected in the Budget Committee second resolution report.
But Mr. President, I would be most happy to turn back the clock to the day of the reported bill. Those amounts have now been greatly exceeded by the large out year tax reductions provided by floor amendments to the bill.
The latest tally shows that the bill would reduce revenues by $21.8 billion in 1979, $60 billion in 1980, $84 billion in 1981, $114 billion in 1982, and $144 billion in 1983.
Let me indicate just a few of the major provisions added by the Senate to the Finance Committee bill:
A sum of $17 billion of additional individual income tax rate reductions, only some of which are contingent upon limited Federal spending;
An additional 2 percentage point reduction in the corporate income tax rate costing $3.4 billion annually;
A scaled down $1.5 billion a year general employment tax credit that both the House and Finance Committee voted to terminate; and
A tuition tax credit costing $1 billion a year when it is fully effective.
Mr. President, two factors were involved in bloating the Finance Committee bill's out year effects to these huge totals.
First, Senators used the $1.4 billion available for additional tax reductions as a toehold for establishing further tax reductions. Once a Senator had his "foot in the door" the effective date of his new tax break could be, and often was, set to minimize the effect on 1979 revenues. As a result, floor amendments reduced revenues by $1.3 billion in fiscal year 1979 but by almost $10 billion in fiscal year 1980.
A second tactic was simply to make additional tax reductions first effective in later years. The most important amendment of this type was the Nunn coalition amendment. That amendment had no effect on revenues in fiscal year 1979, but provided tax cuts increasing to $66 billion in fiscal year 1983 if spending does not exceed specific levels.
My colleagues no doubt recall the vote this Chamber took late last week to reverse the Chair's ruling that the Budget Act required waivers for new tax legislation first effective in 1980.
The effect of the Senate's vote was to remove any budget discipline on tax cuts first effective in 1980; and we have all seen the result.
Mr. President, the Senate bill now includes tax reductions effective in fiscal year 1980 which would total almost $60 billion.
And, what about the 1980 budget deficit, Mr. President? Certainly I do not need to remind this body that a balanced budget is as popular a goal as tax reduction. A majority of this body voted a balanced budget amendment to the IMF bill just a few months ago.
Let us assume for the moment that 1980 spending is consistent with the Nunn coalition amendment. And that spending constraint is a tight one. Would anyone care to guess what those assumptions yield with respect to the 1980 budget deficit?
Well, Mr. President, based upon CBO projections, my calculations indicate that we will have a $45 billion deficit in 1980 under this tax bill. That is $7 billion more than the fiscal year 1979 deficit in the congressional budget.
This is hardly progress toward a balanced budget.
Mr. President, I would be gravely concerned about the impact of this bill on the 1980 budget if I thought that this bill would be enacted into law in its present form. Fortunately, however, I doubt very much that will be the case. The chairman of the Finance Committee is one of the Senate's most talented and effective leaders in House-Senate conferences.
He has given us his word, and amended the bill to demonstrate that he will bring back from conference a tax bill both consistent with the fiscal year 1979 budget, and with very greatly reduced later year tax cuts.
The House-passed version of the pending bill contains significantly lower revenue reductions than the Budget Committee assumed for the first year and out years.
Thus, there is a strong likelihood the tax bill conferees will return with a measure that more closely approximates the Budget Committee's out year tax reduction levels than does the pending bill.
Mr. President, having now reviewed the budgetary effects of the pending bill, let me now briefly summarize my views on the merits of some of its major components.
I am pleased that the Senate bill provides individual income tax reductions which offset for all income classes the increased taxes that otherwise would result in 1979 from inflation, economic growth, and the 1977 social security tax increases. I also applaud the greater progressivity of the Senate bill compared to the House-passed measure, which favored taxpayers with over $50,000 of income at the expense of taxpayers with incomes below that level.
The Senate bill provides relatively large tax cuts for those taxpayers in tax brackets above the $50,000 level, The major reason for these reductions for high income taxpayers in the bill is the very substantial amount of capital gains relief — over $2.6 billion at an annual rate in 1979 even after all secondary effects are taken into account. And this relief will grow to almost $5 billion by 1983.
Except for the tax relief provided on the sale of a principal residence, the capital gains reductions in the Senate bill are too large. Capital gains tax relief will have less impact on capital formation per dollar of revenue loss than business tax cuts which directly reduce the cost of new capital goods, such as the investment credit or accelerated depreciation.
The relative weakness of capital gains tax reductions in stimulating investment stems from two major sources. First, a significant portion of capital gains results from the sale of unimproved real estate, jewelry, art, and other relatively unproductive assets. Second, capital gains tax reductions provide substantial benefits to taxpayers on investments previously undertaken, and to this extent, would generate revenue losses which were not associated with new investments.
A major justification for capital gains tax relief is that it reduces the unfairness of taxing gains attributable only to inflation. However, it is unfair to single out the sale of capital assets for relief from inflation when other income largely attributable to inflation, such as interest income on savings deposits, does not receive any comparable relief.
There are a number of other important provisions in this bill I would have liked to have seen deleted because they will result in significant unjustifiable future year revenue losses.
One such provision is the deferral through 1979 of the "carry over basis" rules enacted as a major reform in the Tax Act of 1976. This reform ended the practice of excluding from income tax any appreciation of property transferred by death.
The long-run revenue gains from this provision were estimated in 1976 to be $1 billion annually. While 1976 provisions are universally acknowledged to be too complex, my colleague and good friend from Maine (Senator HATHAWAY) has developed amendments to eliminate the undue complexity and technical difficulties of the 1976 act provisions. However, the Senate bill does not include the "clean up" amendment proposed by Senator HATHAWAY and instead agreed to postpone the 1976 provisions until 1980. Opponents of carryover basis view a 3-year postponement as a major step toward repeal. This should not be allowed to happen.
Other provisions in the bill that I believe will result in either inefficient or inequitable major tax reductions are: Making the ESOP stock distribution credit permanent, the extension of the employment tax credit, and the tuition tax credit grafted on to this bill.
Mr. President, I have taken this opportunity to review the tax bill's relationship to the 1979 and future budgets, and I have indicated several personal concerns with the composition of tax cuts provided in the bill.
Despite these reservations, I shall vote in favor of this bill.
I do expect, however, that the bill which emerges from the conference will be substantially improved from the bill before us now.
The PRESIDING OFFICER. The bill having been read the third time, the question is, Shall it pass?
On this question, the yeas and nays have been ordered, and the clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
The result was announced — yeas 86, nays 4, as follows:
So the bill (H.R. 13511) as amended, was passed.